Filed Under: ,
Tickers in this Article: PERY, M, JCP, KSS
Clothing maker Perry Ellis (Nasdaq:PERY) lowered guidance for the quarter and the next fiscal year on Thursday of last week, sending shares down to a level not seen since the 2001 recession. After news broke, the stock dropped to close at $3.65 per share, and these lower prices give patient investors the chance at huge gains, provided that the economy avoids further deterioration.

Investors seem worried about a range of issues regarding Perry Ellis, including the growing number of retail bankruptcies and their effects on ordering for the holiday season, bad debt expense and the level of debt overall. The company will report full results on Thursday before the market opens.

Perry Ellis is an apparel company with 29 brands that it distributes to major retailers in the U.S., including Macy's (NYSE:M), J.C. Penney (NYSE:JCP) and Kohl's (NYSE:KSS). In fiscal 2007, Kohl's and Macy's accounted for 15% and 10% of sales, respectively. The company also owns and operates 40 Perry Ellis retail outlet stores. Perry Ellis has sourced most of its products overseas, with the two largest areas being Asia, which accounts for 69% of sales, and Central and South America, which account for 23%. (For guidance about investing in the retail sector, read Analyzing Retail Stocks.)

Reduced Outlook
How bad are things at Perry Ellis? The company reduced its outlook for the third quarter to an earnings range of 30-33 cents per share on revenue of $222.8 million. Full-year revenue guidance for fiscal 2009 ending January 31 was cut to $875-$900 million, down from $910-$925 million. Further, earnings per share was reduced to 90 cents-$1.10 per share, substantially below the previous EPS range of $1.67-$1.72. The most recent reduction marks the second time Perry Ellis has cut guidance this fiscal year. When the company released earnings on August 22 for the second fiscal quarter, full-year guidance was reduced to $1.67-$1.72 per share from $1.95-$2.00.

So why was the market spooked so badly that it sold off Perry Ellis to to $3.65 from Wednesday's previous close of $6.07? The company is obviously leveraged heavily to retail sales, a sector that is shaping up to be a disaster. A recent report from the Department of Commerce showed that retail sales fell in October by 2.8% sequentially and declined 4.1% year-over- year. It should be noted that the company still earned from 30-33 cents per share in the quarter that ended Oct. 31. However, whether the company produced free cash flow during the quarter is unknown.

Debt Concerns?
On Oct. 30, Perry Ellis renewed its bank credit facility through 2012, with a total availability of $200 million of which $56.6 million has been drawn. The company has one debt issue outstanding - $150 million of the 8.875% notes due September 15, 2013, which produces no rollover risk. It also has a mortgage on one of its buildings for $15 million. During the company's second quarter, management reported total debt at $197 million.

Perry Ellis has spent the past five years whittling down its debt. As a result, analysts did not seem worried about Perry Ellis's debt during the company's second quarter conference call, in which not a single question was raised on debt or covenants. (Read more about evaluating what a company owes at Debt Reckoning.)

Perry Ellis\'s Debt Reduction
Over Last Five Years
Fiscal Year Total Debt
2008
$175,927
2007
$237,737
2006
$259,245
2005
$233,031
2004
$257,158
*Numbers in thousands
Bottom Line
During the last recession, the company earned a net profit of $1.59 per share in 2000 and $1.16 per share 2001. Perry Ellis stock last traded in the $3-$4 range in 2001, but was trading above $33 just last year. After the economy recovered last time, investors who had been patient were rewarded with large gains. If recent history is any indication, Perry Ellis could be a bargain buy today that yields lucrative gains in the future.

Find out more about investing during difficult economic times at Four Tips for Buying Stocks in a Recession.

comments powered by Disqus

Trading Center